Steven Fries

1
The Business Environment, Employment and
Enterprise PerformanceEvidence from Transition
Economies

• Steven Fries
• Deputy Chief Economist

2
Introduction

• What are the drivers of Investment, employment
  and growth of firms in transition economies?
• Business environment and governance are key
• Unique insights gained from the EBRD World Bank
  Business Environment and Enterprise Performance
  Survey
• Business environment obstacles impose significant
  costs and constraints on firms
• Business environment and state capture also
  affect investment, jobs and firm growth

3
What is the Business Environment?

• Business taxation and regulation
• Provision of essential business services
• Access to infrastructure services and finance
• Provision of essential public goods
• Law and order
• Contract enforcement and protection of property
  rights
• Corruption in public administration and judiciary
• Exercise of undue influence by firms over state
• Creates uneven playing field for firms

4
How good is the business environment?

• Assessments from EBRD WB Business Environment
  and Enterprise Performance Survey
• Based on first-hand assessments of local firms
• Implemented in 1999, 2002 and 2005
• Questions on key aspects of the business
  environment, ties between firms and government
  and enterprise performance
• Shows how the business environment varies across
  dimensions and countries and over time and how it
  affects enterprise performance

5
Survey Sample, 2002

• About 6,100 firms surveyed, up from 4,100 in 1999
• Firm shares in industry services reflect GDP
  shares
• Within industry and services, representative of
  firm population

6
How reliable are the business environment
measures?

• Consistency checks performed on measures
• Comparison of qualitative measures with objective
  statistical measures (macroeconomic instability)
• Too pessimistic in the Kyrgyz Republic in 1999
  and too optimistic in Azerbaijan in 2002
• No evidence of excessive optimism or pessimism in
  business environment dimensions related to
  business cycle
• Significant consistency within BEEPS between
  qualitative and quantitative measures

7
How good is business environment in Eastern
Europe and Central Asia?

• Improving but could be better

Total
8
Largest business environment improvements in 2002
seen in the CIS

• and in some South-east European countries

Change from 1999 to 2002
9
2002 Business environment perceptions

• Most South-east European countries below the
  median

Business environment measures in 2002
10
Obstacles in the business environment impose
significant costs on firms

• Time tax evidence of the states grabbing hand

Time tax if no bribes paid to public officials
(per cent)
Time tax if bribes paid to officials (per cent)
11
Obstacles in the business environment impose
significant costs on firms

• Overall bribe tax is high in some countries

Average bribe tax
12
Obstacles in the business environment impose
significant costs on firms

• High crime losses in some countries

Per cent of total sales
13
Obstacles in the business environment impose
significant constraints on firms

• Working days lost due to infrastructure failures

Days
14
Obstacles in the business environment impose
significant constraints on firms

• Banking inefficiencies limit access to finance

Proportion of new investment financed from
retained earnings
15
Capital, employment and firm growth

• Capital investment is the major driver of growth

Contribution of factors to real revenue growth
Factors of production
16
Business environment and growth
-0.15 -0.24 -0.39 (-3.06) (-2.85) (-6.95)
Capacity utilisation rate in 1999
Acceleration of real GDP growth in 2001 v.
1999-2001 average
0.88 1.16 1.42 (2.01) (1.52) (2.82)
-10.03 33.51 1.93 (-2.58) (4.96) (0.43)
Country business environment in 1999
10.58 6.83 12.77 (2.49) (0.91) (2.59)
Captor firm (laws and regulation)
2.29 -0.33 -3.44 (0.90) (-0.07) (-1.19)
External cost of capture (laws and regulations)
17
Firm ownership, size and growth
-8.86 -3.56 -12.00 (-2.39) (0.58) (-2.83)
State ownership
New private ownership
18.26 4.76 20.63 (6.30) (0.93) (6.23)
7.94 29.38 5.98 (2.50) (5.33) (1.64)
Foreign ownership
12.03 -47.65 14.21 (5.24) (-12.99) (5.45)
Log of employment
-0.88 4.22 -0.93 (-2.39) (8.78) (-2.81)
Log of employment squared
18
Competition and growth
0.32 5.22 -0.91 (0.11) (1.02) (-0.27
Price elasticity of demand - low
Price elasticity of demand - moderate
-6.10 -6.85 -10.03 (-1.84) (-1.19) (-2.65)
Price elasticity of demand - high
-5.20 -6.14 -14.27 (-1.77) (-1.21) (-4.28)
4,444 4,654 4,549
Number of observations
Adjusted R - squared
0.04 0.09 0.07
controls for sector and location within
countries omitted
19
State capture also affects productivity and growth

• State capture supports investment and growth of
  captor firms, but

Per cent increase, 1999-2001
20
State capture also affects productivity and growth

• holds back the productivity of firms affected
  by capture

Per cent increase, 1999-2001
21
Conclusion

• Reforms in transition economies are paying
  dividends
• A better business environment supports investment
  and growth of firms, but
• firms substitute capital for labour to become
  more competitive
• But significant obstacles remain to be addressed
• Business environment and state capture
• Wide variation across dimensions and countries
• Sustaining the reform drive should lead to even
  stronger firm performance
• More investment, higher productivity and
  potentially jobs
• BEEPS implemented again in 2005 to monitor
  progress